International Taxation and Transfer Pricing
This domain tests cross-border income, treaty relief and the arm’s-length principle for transactions between associated enterprises.
Core rules
- A resident is generally taxed on global income, with foreign tax relief under section 90 for treaty countries or section 91 for non-treaty countries. A non-resident is taxed on Indian-source income, including business connection, property, salary for Indian services and specified royalties or fees for technical services.
- DTAA provisions apply where they are more beneficial than the domestic law. Permanent establishment, residence and beneficial ownership tests determine treaty claims. Royally and fees for technical services are taxed under specific articles and domestic law.
- Transfer pricing applies to international transactions between associated enterprises. Income must be at arm’s length. Methods include comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin and other prescribed methods.
- Documentation, accountant’s report, safe harbour and advance pricing agreement provisions support compliance. Specified domestic transactions may also be covered.
Worked example
An Indian company pays a US associated enterprise ₹1,00,00,000 for services. Comparable independent transactions indicate ₹80,00,000. The arm’s-length adjustment is ₹20,00,000, increasing Indian taxable income. The company must maintain documentation and report the transaction; treaty relief does not replace transfer pricing.
Traps
Do not assume a treaty always reduces tax; check PE and beneficial ownership; compare the most appropriate method; remember secondary adjustments; distinguish associated enterprises from unrelated parties; documentation is substantive, not paperwork only.